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PURCHASES AND PAYMENTS CYCLE UNIT 2 - Coggle Diagram
PURCHASES AND PAYMENTS CYCLE
UNIT 2
OVERVIEW
Refers to the process of procuring goods and the resulting payments
Also known as the "Supply Chain Management System" or "Procurement"
Consists of four distinct functions which are split into two cycles
Purchasing cycle
Receiving of goods function
Recording of goods function
Ordering of goods function
Payments cycle
Payments to creditors/payables function
1. ORDERING OF GOODS FUNCTION (PURCHASING CYCLE) (LESSON 1)
Documents
List of approved suppliers
Supplier price lists
Requisitions
Purchase orders (PO's)
Activities and controls
A purchasing department or buyer must be employed by the company
Purchasing policy which governs reorder levels of inventory
Purchase requisition to be made out by the purchasing department/buyer when reorder levels are reached
List of approved suppliers
List of approved suppliers must exist which cannot be deviated from under any circumstances
Senior authorization required if unauthorized suppliers are to be used
All changes to list of approved suppliers requires senior authorization
Purchase orders
Should include the following information:
Name of supplier
Quantity ordered
Description of goods
Price of goods
Discounts
Terms of payment
Delivery address
Signature of purchase department/buyer
To be authorized by purchase manager before it is sent to supplier
Sequentially numbered
Issued in triplicate:
Supplier
Receiving department
Deliveries pending register to be matched with delivery note (DN)
2. RECEIVING OF GOODS FUNCTION (PURCHASING CYCLE) (LESSON 2)
Documents
Supplier DN
Goods received notes (GRN)
Copy of PO
Activities and controls
Details of goods received:
Details of goods received to be captured on GRN
GRN signed off by receiving clerk
GRN
Include the following detail:
Quantity of goods received
PO number
Date of receipt of goods
Description of goods
Details of receiving clerk
Issued in duplicate:
Ordering department
Accounts department (together with copy of PO and DN)
Receipt of goods:
On receipt of goods the receiving clerk must inspect the goods for
type, quality, and quantity (against PO)
before DN is signed
Treatment of damaged goods:
Damaged goods must not be accepted
Must be returned to supplier
Accounts department and purchasing department to be notified
3. RECORDING OF GOODS FUNCTION (PURCHASING CYCLE) (LESSON 3)
Documents
Copy of GRN
DN from supplier
Copy of PO
Purchase journal
Supplier invoice
Credit notes
Activities and controls
Recording of purchases:
Purchases should be entered directly in purchase journal and filed under the supplier name and checked to the statement received from the supplier
Disputed invoices:
To be kept separately and followed up by a senior member of staff
Invoices received
Should not be entered into records if it has not been approved as correct by a person whose duty it is to check the accuracy of the supplier invoices
The person(s) should check the following:
Quality, quantity, type, and date - to the GRN and DN
Price, terms, and account details - agreed to PO
Calculations on the invoices
Goods returned:
All goods returned must be sent back to the supplier and a credit note is to be made out to the supplier
4. PAYMENTS TO CREDITORS/PAYABLES FUNCTION (PAYMENTS CYCLE) (LESSON 4)
Documents
Cheques
Bank statements
Remittance advices
Cash payments journal
Activities and controls
Controls over cheque forms:
Cancelled cheques should be clearly marked as 'cancelled' and attached to the relevant cheque counterfoil, or separately filed
All cheques to be sequentially numbered
All paid cheques to be filed in numerical order
Cash cheques should be discouraged
All cheques must be crossed with the words 'not transferable'
Drawing and signing of cheques:
Cheques drawn should be presented to persons authorized to sign and must be supported with the necessary supporting documentation
Documents to be paid must be inspected and if agreed that the expenditure was valid and accurate, the documents must be marked as paid in order to prevent re-submission for payment
Cheques should be signed by two signatories with the necessary authority
Recording of payments:
Recording of cheques must be done by persons who are independent of those who draw, sign, or handle the cheques - to ensure segregation of duties
Cheques returned from bank must not be available to the person who keeps accounts payable records
The control account must not be accessible to the individuals responsible for maintenace of the accounts payable sub ledger
Regular reconciliations are to be performed by a person who is independent from those maintaining the sub ledger
Individual creditor reconciliations of all creditor balances are to be produced on a monthly basis
EFT is also a valid payment method (Unit 1)
CONTROL OBJECTIVES AND INTERNAL CONTROLS IN THE PURCHASES AND PAYMENTS CYCLE (LESSON 5)
Control objectives in the purchasing cycle
Accuracy (all orders are carried out accurately; all purchase transactions are accurately recorded at the correct quantity, and the correct amount, and are arithmetically correct)
Internal controls
1) Purchase invoice is independently checked for mathematical accuracy before it is recorded in the PJ.
The following must be verified:
Prices compared with orders/price list
Quantity checked on GRN
Accounting accuracy checked
2) PJ is updated from the purchase invoices
3) Stock records updated from the GRN
Recording (all purchase transactions are correctly recorded)
Internal controls
1) PJ updated from purchase invoices
2)
From PJ, invoices are posted to
:
Creditor accounts in creditors ledger
Purchase and creditor control account in general ledger
3) Creditor control account is kept up to date and regularly reconciled with the list of creditors; management signs as evidence of review
Completeness (all valid purchase transactions are recorded and nothing is left out)
Internal controls
2) Two persons inspect goods on receipt for quality and quantity and prepare a GRN
3) GRN is matched with DN and short deliveries are indicated on the DN and a credit request is made out
1) A requisition is made out when stock decreases to reorder level
4) A register of unmatched invoices is kept and is regularly followed up by the senior buyer
5) GRN is matched with invoice and then recorded in PJ
6) All requisitions, orders, and GRN are recorded numerically and missing umbers are followed up
Classification (all purchase transactions are correctly classified according to the nature thereof)
Internal controls
1) Intergroup purchases (if any) are clearly distinguished by a code number and separately recorded
Authorization (all purchases are approved according to company policy)
Internal controls
2) PO prepared by buyers only
3) PO authorized by purchasing manager and supporting documentation is cancelled
1) If stock decreases to reorder level, a requisition is made out by computer or by storeman
Cut-off (all purchase transactions are recorded in the correct reporting period)
Internal controls
1) PJ updated from invoices in respect of date of delivery
Occurrence/Validity (all recorded purchases are valid and supported by proper documentation)
Internal controls
1)
All entries in the PJ is supported by the following:
Requisitions
PO
GRN
DN
Invoices
Creditor statement (credit ourchases)
General controls (Easy marks which can be applied to any cycle)
Management control
Internal audit
Personnel take leave regularly
Sufficient stationery control
Rotation of duties
Scrutinize all records and documents for extraordinary items
Segregation of duties
Test castings and calculations on all selected items, documents and ledger accounts
Supervision and review
Control objectives in the payments cycle
Accuracy (Payments are made at the correct amount and are arithmetically correct)
Internal controls
1) Individual creditor reconciliations (recon per supplier, known as supplier recons) are prepared and serve as supporting documentation for payments
2) All calculations are reviewed by an independent person
Recording (all payment transactions are correctly recorded)
Internal controls
1) Payments are posted from the payment advice to the individual creditor account and the total to the creditors control account
Completeness (all valid payment transactions are recorded and nothing is left out)
Internal controls
1) Creditors control account is kept up to date in the general ledger and regularly reconciled with the creditor's ledger
2) Payment advices are recorded numerically and missing numbers are followed up
Classification (all payments classified to the correct creditor account)
Internal controls
1) Payments coded according to the creditor number and posted on date of cheque
2) Independent person reviews codes and date of payment
Authorization (all payments are authorized according to company policy)
Internal controls
1) All payments made to creditors done by means of a cheque requisition which is authorized by a senior official
2) Two signatories review and cancel supporting documentation before approving payment
Cut-off (all payments recorded at date of payment per payment advice and date of cheque)
Internal controls
1) All payments are recorded in correct period in respect of the date of the cheque
Occurrence/Validity (all payments on creditor accounts are valid and are supported by proper documentation)
Internal controls
1)
Creditor payments are supported by:
Cheque payment requisition
Creditor statement
Creditor reconciliation
PO, GRN, DN from supplier, invoice
WEAKNESSES AND RECOMMENDATIONS IN THE PURCHASES AND PAYMENTS CYCLE
Risk - Exists when there is a weak internal control environment (weaknesses)
Example
The risk of double payment when supporting documentation is not cancelled before payment is made to a supplier (weakness)
Weaknesses - Deficiencies in the internal control environment (which creates risks)
Example
Supporting documentation is not cancelled when a payment is made to a supplier (creating the risk of double payment)
Recommendations - Steps taken/controls put in place to mitigate risks
Example
Supporting documentation must be cancelled when a payment is made to a supplier